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Question

(a) Explain verbally and digramatically why Christmas trees are cheaply sold on Christmas Eve (compared to their intial price) by considering both demand and supply.

(b) Assuming zero disposal costs, why is the correct profit maximising price to charge for the unsold trees on Christmas Eve the one at which the elasticity of demand is equal to -1? Illustrate using a diagram. Would the price be lower still if there were some disposal costs that the seller would face to dispose of the unsold trees?